Our Office will be closed Nov.21 – Nov.25 in observance of Thanksgiving. We will return to regular business hours on Monday, Nov. 28.
Our Office will be closed Nov.21 – Nov.25 in observance of Thanksgiving. We will return to regular business hours on Monday, Nov. 28.
The opportunity zone program was created through the passage of tax reform in 2017, also known as the Tax Cuts and Jobs Act (P.L. 115-97). Over $10 billion dollars have been deployed into qualified opportunity zone investments. While the investment has slowed, COVID-19 and additional guidance has created renewed interest in utilizing this program to assist with underserved communities and to provide tax relief for investors. Discussions and drafts of proposed bills would extend the program and provide other favorable provisions to investors. As a result, planning opportunities exist for new investments into the program, as well as for current investments.
Treasury and the IRS released final regulations and proposed regulations at the end of 2019. Additional guidance has been released in the form of correcting amendments, Notice 2020-23, and Notice 2020-39.
In Notice 2020-39 the IRS provided relief to qualified opportunity funds (QOFs) and their investors in response to the COVID-19 pandemic. Additionally, the IRS has updated its Qualified Opportunity Zones frequently asked questions. The guidance provided the following relief:
2020, through December 31, 2020, will be considered to be due to reasonable cause and that the failure will not prevent qualification of an entity as a QOF or an investment in a QOF from being a qualifying investment. The QOF will not be liable for the statutory penalty for any failures to meet the asset testing during this period. The QOF, however, must complete all lines on the annual filing of the Form 8996 – Qualified Opportunity Fund. This relief is automatic. If this exception applies, the taxpayer should place a zero in Part IV, line 8, “Penalty” on this form.
The Treasury Department and the Internal Revenue Service recently issued correcting amendments to the opportunity zone final regulations under Section1400Z, that were previously released on December 19, 2019. The correcting amendments are effective on April 1, 2020, and, are applicable as of January 13, 2020. While there were numerous changes, the following provides a summary of the key provisions.
The correcting amendments further provide language that appears to state that during a working capital safe harbor period, an entity meets the 70% tangible property standard. Under this interpretation, the 70% tangible property standard would be suspended during the safe harbor period. As such, non-QOZB property (i.e., bad assets) would not impact the asset requirement. This provision is very beneficial for start-up entities.
Further, the correcting amendments clarify that working capital itself is never treated as QOZB property for any purpose. It is not included in determining the 70% tangible property standard.
A QOF that receives an investment before June 30, 2020, will be required to invest those funds within six months, or December 31, 2020. If a QOF delayed the receipt of those funds until sometime in July 2020, then the QOF will have until June 30, 2021, to invest those funds into qualified opportunity zone property. The testing is done every six months and the investment is given six months to be deployed, so there would be no issue with the December 31, 2020, testing. The next testing period will be June 30, 2021. Planning the receipt of funds is important and provides some flexibility.
Many investors sold stock in reaction to COVID-19 to reap the capital gains. As a result, investors may have capital gains available to invest. Previously, some investors did not like the 10-year required holding period required to escape taxation on the gain during the time of the investment in the QOF. During this time of market uncertainty, the 10-year investment holding period may be more appetizing. The 10-year period may leap frog this uncertainty period. As a result, investors are looking at real estate projects and other businesses that may not have been previously considered. QOFs should be prepared to receive these funds that will likely expire in late summer or early fall.
The final regulations provided that the “original use” provision does not apply to property that has been vacant for three years, if it was bought by the QOF after 2018. The “original use” test would have required the investor to substantially improve the property. This is not required for these vacant properties, which would eliminate the significant funds required for substantial improvements. A building or land meets the rule of being vacant if 80% of its usable space is empty. As such, a large property that is still 20% leased would likewise be exempt from the “substantial improvement” rule. Additionally, buildings acquired directly from the government through bankruptcies or tax sales would not have to be substantially improved. There will likely be numerous abandoned, foreclosed, and government tax sales properties in opportunity zones as a result of COVID-19. These properties may now be more attractive due to the elimination of the “substantial improvement” requirement.
The CARES Act permits NOLs from 2020 to be carried back five years to offset taxable income. This can be particularly valuable if it is carried back to a year with a pre-tax reform tax rate (e.g., 35% for corporations). As such, investors want to increase the NOL in 2020. Taxpayers may wish to defer the gross (not net) capital gains by investing in a QOF, even in a loss year.
Under the final regulations, investors do not need to net Section 1231 gains with Section 1231 losses. As such, investors do not need to wait until year end to invest in opportunity zones. Rather, an investor can invest the capital gain on the sale of business property into a QOF, while maintaining the loss amount separately. Accordingly, the Section 1231 loss, to the extent that it can create a NOL, can be carried back for five years, generating cash refunds (especially if it is at a pre-tax reform rate).
Property acquired and placed in service between September 27, 2017, and December 31, 2022, is eligible for 100% bonus depreciation. The CARES Act corrected the depreciable life of QIP from 39 years to 15 years. QIP is now bonus-eligible property. Pursuant to the opportunity zone final regulations, there is no bonus recapture. If the property is held for the 10-year period, an investor may create a permanent tax benefit. As a result, cost segregation studies for non-commercial property are extremely valuable. You would get the deductions for bonus depreciation with no recapture and the step up in basis at the end of the 10-year holding period. If the QOZB elects to be a real property trade or business to prevent the Section 163(j) limitation, then bonus depreciation is not permitted. However, QIP would be reduced from a 39-year life to a 20-year life, which still provides tax benefits to the investors. Bonus depreciation may likewise result in NOL carrybacks that could be extremely valuable.
The final regulations also allow a QOZB to extend the 31-month period for project delays resulting from government approvals. Many government entities are limiting services. As such, any delay in permits or other approvals should be documented.
With COVID-19 and the resulting financial crisis, the Qualified Opportunity Zone program is a valuable tool for purposes of revitalizing distressed communities. Some state plans have already utilized the infrastructure of the program for their own investment incentive programs. Opportunity zones can assist in producing public-private partnerships that are critical for the recovery of distressed communities and will be needed for an increase in affordable housing and mixed-use projects, as well as job creation. Congress could provide additional incentives during this time of uncertainty to bring in additional capital investments. How Congress enhances the opportunity zone program will likely impact its durability. Funding for underserved communities is more important than ever and the opportunity zone program may be a key tool to revitalize these communities and the economy.
The novel coronavirus (COVID-19) has disrupted business continuity across all industries, and retail is already feeling the impact. While retailers’ primary concern is the safety and wellbeing of their professionals and customers, this crisis requires specialized urgency and sensitivity given the widespread impact and uncertainty of the pandemic’s duration.
Unlike other industries, retail is an anomaly in that there is a stark difference between how companies in different sectors are absorbing the COVID-19 shock. For grocers and general merchandisers, supply and demand curves have skewed way off the charts and retailers are struggling to keep up with historic demands for soap, disinfectants, paper towels and shelf-stable food. For example, during the week of February 23-29, hand sanitizer revenue sales increased 420% and both Clorox/Lysol wipes and canned food revenue sales experienced a 183% increase from the week prior, according to Bloomreach.
On the contrary, specialty and luxury retailers are experiencing a dip in demand due the fact that their goods are considered “non-essential”. As a result of social distancing mandates and shifting consumer priorities, COVID-19 is brick-and-mortars’ latest impediment, validated by a recent GlobalData study which states that 12.1% of people admitted to visiting malls less in response to the outbreak. In addition, some retailers including Macy’s, Nordstrom, H&M and Ikea have shut their doors across the U.S. until further notice in an attempt to help contain the outbreak. These developments only compound the trend of declining foot traffic due to e-commerce growth that retailers have been grappling with in recent years.
While it may seem natural for transactions to be diverted to online, e-tailers are not necessarily experiencing smooth sailing either. For example, Amazon is seeing huge surges in demand, and yet, the same GlobalData study shows that Amazon is the least cited destination for stocking up (6.0%) compared with Walmart (21.9%), Costco (8.5%) and pharmaceutical convenience stores such as CVS (7.1%). This could perhaps be explained by e-commerce price gouging, and sheds light on the fact that even during dire circumstances, consumers will still look for that perfect balance between high convenience and low cost. In fact, just over one-third (34%) of consumers list price as their top priority for essential retail purchases today, compared with 20% who rate convenience first, according to a recent BDO survey conducted online by The Harris Poll among over 1,000 U.S. adults ages 18+.
Pre-COVID-19, almost three-quarters (73%) of retail CFOs said their business was thriving and just 22% said a potential economic downturn was their business’s greatest threat, according to BDO’s 2020 Retail Rationalized Survey. Now with the reality of COVID-19 and subsequent stock market decline, continued momentum is threatened, and retailers should prepare to pivot under new constraints. With a market that recently entered into bear territory and the economy’s cyclical nature, the looming recession could be upon us sooner than once anticipated.
Here’s what retailers can do in the interim:
Looking ahead, monitoring announcements from the CDC and WHO can help guide the trajectory in which remedial steps should be taken. The retail industry has time and again experienced hardship and proved its resilience above the turbulence.
To learn more about how your organization can navigate immediate disruptions due to the novel coronavirus and prepare for the future, don’t hesitate to reach out.
Survey Methodology for the Harris Poll: This survey was conducted online within the United States by The Harris Poll on behalf of BDO USA from March 25-26, 2020 among 1,045 U.S. adults ages 18 and older. This online survey is not based on a probability sample and therefore no estimate of theoretical sampling error can be calculated. For complete survey methodology, including weighting variables and subgroup sample sizes, please contact your trusted advisor.
Converting a traditional IRA to a Roth IRA can provide tax-free growth and tax-free withdrawals in retirement, but what if you convert your traditional IRA — subject to income taxes on all earnings and deductible contributions — and then discover you would have been better off if you left it as a traditional IRA?
Before the Tax Cuts and Jobs Act (TCJA), you could undo a Roth IRA conversion using a “recharacterization.” Effective with 2018 conversions, the TCJA prohibits recharacterizations. If you executed a conversion in 2017, you may still be able to undo it.
Reasons to recharacterize
Generally, if you converted to a Roth IRA in 2017, you have until October 15, 2018, to undo it and avoid the tax hit.
Here are some reasons you might want to recharacterize a 2017 Roth IRA conversion:
If you recharacterize your 2017 conversion but would still like to convert your traditional IRA to a Roth IRA, you must wait until the 31st day after the recharacterization. If you undo a conversion because your IRA’s value declined, there is a risk that your investments will bounce back during the waiting period, causing you to reconvert at a higher tax cost.
Recharacterization in action
Sally had a traditional IRA with a balance of $100,000 when she converted it to a Roth IRA in 2017. Her 2017 tax rate was 33%, so she owed $33,000 in federal income taxes on the conversion.
However, by August 1, 2018, the value of her account had dropped to $80,000. So Sally recharacterizes the account as a traditional IRA and amends her 2017 tax return to exclude the $100,000 in income.
On September 1, she reconverts the traditional IRA, whose value remains at $80,000, to a Roth IRA. She will report that amount when she files her 2018 tax return. The 33% rate has dropped to 32% under the TCJA. Assuming Sally is still in this bracket, this time she’ll owe $25,600 ($80,000 × 32%) — deferred for a year and resulting in a tax savings of $7,400.
(Be aware that the thresholds for the various brackets have changed for 2018, in some cases increasing but in others decreasing. This, combined with other TCJA provisions and changes in your income, could cause you to be in a higher or lower bracket in 2018.)
Know your options
If you converted a traditional IRA to a Roth IRA in 2017, it is worthwhile to see if you could save tax by undoing the conversion. If you are considering a Roth conversion in 2018, keep in mind that you will not have the option to recharacterize. See your financial adviser whether recharacterizing a 2017 conversion or executing a 2018 conversion makes sense for you.
Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic or crypto currency.
While most smaller businesses are not yet accepting bitcoin or other virtual currency payments from their customers, more and more larger businesses are. Businesses also can pay employees or independent contractors with virtual currency. But what are the tax consequences of these transactions?
Virtual Currency 101
Virtual currency has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies and is most commonly obtained through virtual currency ATMs or online exchanges.
Goods or services can be paid for using “virtual currency wallet” software. When a purchase is made, the software digitally posts the transaction to a public ledger. This prevents the same unit of virtual currency from being used multiple times.
Questions about the tax impact of virtual currency abound and the IRS has yet to offer much guidance.
In 2014, the IRS ruled that bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. This means that businesses accepting virtual currency payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received, measured in equivalent U.S. dollars.
When a business uses virtual currency to pay wages, the wages are taxable to the employees to the extent any other wage payment would be. You must, for example, report such wages on your employees’ W-2 forms. They are subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date received by the employee.
When a business uses virtual currency to pay independent contractors or other service providers, those payments are also taxable to the recipient. The self-employment tax rules generally apply, based on the fair market value of the virtual currency on the date received. Payers generally must issue 1099-MISC forms to recipients.
Finally, payments made with virtual currency are subject to information reporting to the same extent as any other payment made in property.
Deciding whether to go virtual
Accepting virtual currency can be beneficial because it may avoid transaction fees charged by credit card companies and online payment providers (such as PayPal or Venmo, in some cases) and attract customers who want to use virtual currency. It can also pose tax risks as guidance on the tax treatment or reporting requirements is limited.
It is important to research and contact your business adviser on the tax considerations when deciding whether your business should accept bitcoin or other virtual currencies.
Tax reform has led to confusion over some of the changes to longstanding deductions, including the deduction for interest on home equity loans.
The IRS has since clarified that the interest on home equity loans, home equity lines of credit and second mortgages will, in many cases, remain deductible under the new laws, regardless of how the loan is labeled.
Under prior tax law, taxpayers could deduct “qualified residence interest” on a loan of up to $1 million secured by a qualified residence, plus interest on a home equity loan (other than debt used to acquire a home) up to $100,000. The home equity debt could not exceed the fair market value (FMV) of the home reduced by the debt used to acquire the home.
For tax purposes, a qualified residence is the taxpayer’s principal residence and a second residence, (e.g. house, condominium, cooperative, mobile home, house trailer or boat). The principal residence is where the taxpayer resides most of the time; the second residence is any other residence the taxpayer owns and treats as a second home. Taxpayers are not required to use the second home during the year to claim the deduction. If the second home is rented to others, though, the taxpayer also must use it as a home during the year for the greater of 14 days or 10% of the number of days it is rented.
In the past, interest on qualifying home equity debt was deductible regardless of how the loan proceeds were used. A taxpayer could, for example, use the proceeds to pay for medical bills, tuition, vacations, vehicles and other personal expenses and still claim the itemized interest deduction.
The new tax rules
The new rule under tax reform limits the amount of the mortgage interest deduction for taxpayers who itemize through 2025. Beginning in 2018, a taxpayer can deduct interest only on mortgage debt of $750,000. The congressional conference report on the law stated that it also suspends the deduction for interest on home equity debt. And the actual bill includes the section caption “DISALLOWANCE OF HOME EQUITY INDEBTEDNESS INTEREST.” As a result, many people believed tax reform eliminates the home equity loan interest deduction.
On February 21, the IRS issued a release explaining that the law suspends the deduction only for interest on home equity loans and lines of credit that are not used to buy, build or substantially improve the taxpayer’s home that secures the loan. In other words, the interest is not deductible if the loan proceeds are used for certain personal expenses, but it is if the proceeds go toward, for example, a new roof on the home that secures the loan. The IRS further stated that the deduction limits apply to the combined amount of mortgage and home equity acquisition loans — home equity debt is no longer capped at $100,000 for purposes of the deduction.
Some examples from the IRS help show how the new rules work:
The new IRS announcement highlights the fact that the nuances of tax reform will take some time to flesh out completely. We will keep you updated on the most significant new rules and guidance as they emerge.
The Tax Cuts and Jobs Act makes changes to the general business credit by adding a new component credit for paid family and medical leave, and changing two current component credits, i.e., the rehabilitation credit and the orphan drug credit.
First, the Act introduces a new component credit for paid family and medical leave, i.e. the paid family and medical leave credit, which is available to eligible employers for wages paid to qualifying employees on family and medical leave. The credit is available as long as the amount paid to employees on leave is at least 50% of their normal wages and the leave payments are made in employer tax years beginning in 2018 and 2019. That is, under the Act, the new credit is temporary and won’t be available for employer tax years beginning in 2020 or later unless Congress extends it further.
For leave payments of 50% of normal wage payments, the credit amount is 12.5% of wages paid on leave. If the leave payment is more than 50% of normal wages, then the credit is raised by .25% for each 1% by which the rate is more than 50% of normal wages. So, if the leave payment rate is 100% of the normal rate, i.e. is equal to the normal rate, then the credit is raised to 25% of the on leave payment rate. The maximum leave allowed for any employee for any tax year is 12 weeks.
Eligible employers are those with a written policy in place allowing (1) qualifying full-time employees at least two weeks of paid family and medical leave a year, and (2) less than full-time employees a pro-rated amount of leave. On that note, qualifying employees are those who have (1) been employed by the employer for one year or more, and (2) who, in the preceding year, had compensation not above 60% of the compensation threshold for highly compensated employees. Paid leave provided as vacation leave, personal leave, or other medical or sick leave is not considered family and medical leave.
Second, the Act changes the rehabilitation credit for qualified rehabilitation expenditures paid or incurred starting in 2018, by eliminating the 10% credit for expenditures for qualified rehabilitation buildings placed in service before 1936, and retaining the 20% credit for expenditures for certified historic structures, but reducing its value by requiring taxpayers to take the credit ratably over five years starting with the date the structure is placed in service. Formerly, a taxpayer could take the entire credit in the year the structure was placed in service. The Act also provides for a transition rule for buildings owned or leased at all times on and after Jan. 1, 2018.
Third, the Act also makes significant changes to another component credit of the general business credit, i.e., the orphan drug credit for clinical testing expenses for certain drugs for rare diseases or conditions. For clinical testing expense amounts paid or incurred in tax years beginning in 2018, the former 50% credit is cut in half to 25%. Taxpayers that claim the full credit have to reduce the amount of any otherwise allowable deduction for the expenses regardless of limitations under the general business credit. Similarly, taxpayers that capitalize, rather than deduct, their expenses have to reduce the amount charged to a capital account. The credit has been reduced and now equals 25 percent of qualifying clinical testing expenses. However, the Act gives taxpayers the option of taking a reduced orphan drug credit that if elected allows taxpayers to avoid reducing otherwise allowable deductions or charges to their capital account. The election for the reduced credit for any tax year must be made on a tax return no later than the time for filing the return for that year (including extensions) and in a manner prescribed by IRS. Once the reduced credit election is made, it is irrevocable.
Net Operating Losses
Under pre-Tax Cuts and Jobs Act law, a net operating loss (NOL) for any tax year was generally carried back two years, and then carried forward 20 years. Taxpayers could elect to forego the carryback. The entire amount of the NOL for a tax year was carried to the earliest of the tax years to which it may be carried, then carried to the next earliest of those tax years, etc.
New Law: Tax Reform repeals the general two-year NOL carryback and the special carryback provisions, but provides a two-year carryback for certain losses incurred in a farming trade or business. The Act also provides that NOLs may be carried forward indefinitely. There is also a provision that limits the NOL deduction to 80% of taxable income.
Disallowance of Excess Business Losses
Under pre-Tax Cuts and Jobs Act law, if a non-corporate taxpayer received any applicable subsidy for any tax year, the taxpayer’s excess farm loss for the tax year wasn’t allowed. Thus, the amount of losses that could be claimed by an individual, estate, trust, or partnership were limited to a threshold amount if the taxpayer had received an applicable subsidy. For this purpose, an excess farm loss was the excess of the taxpayer’s aggregate deductions that were attributable to farming businesses over the sum of the taxpayer’s aggregate gross income or gain attributable to farming businesses plus a threshold amount. Any excess farm loss was carried over to the next tax year.
New Law: The Tax Cuts and Jobs Act provides that, for a tax year of a taxpayer other than a corporation beginning after Dec. 31, 2017 the limitation on excess farm loss for non-corporate taxpayers under Code Sec. 461(j) doesn’t apply. Thus, for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, excess business loss of a taxpayer other than a corporation are not allowed for the tax year. In other words, the Tax Cuts and Jobs Act expands the limitation on excess farming loss to other non-corporate taxpayers engaged in any business. This can apply to the excess business loss of sole proprietorships, partnerships, S corporations, limited liability companies (LLCs), estates, and trusts.
An “excess business loss” is the excess (if any) of the taxpayer’s aggregate deductions for the tax year that are attributable to trades or businesses of the taxpayer, over the sum of: (i) the taxpayer’s aggregate gross income or gain for the tax year which is attributable to those trades or businesses, plus (ii) $250,000 (200% of that amount for a joint return (i.e., $500,000)).
Any loss that is disallowed as an excess business loss is treated as a net operating loss (NOL) carryover to the following tax year. Under the Tax Cuts and Jobs Act, NOL carryovers are generally allowed for a tax year up to the lesser of the carryover amount or 90% (80% for tax years beginning after 2022) of taxable income determined without regard to the deduction for NOLs.
As you can see from this overview, the new law affects many areas of taxation. If you wish to discuss the impact of the law on your particular situation, please give us a call.
On December 20, the House passed the reconciled tax reform bill, commonly called the “Tax Cuts and Jobs Act of 2017” (TCJA), which the Senate had passed the previous day. Once signed by the President, this marks the most sweeping tax legislation since the Tax Reform Act of 1986.
The bill makes small reductions to income tax rates for most individual tax brackets, significantly reduces the income tax rate for corporations and eliminates the corporate alternative minimum tax (AMT). It also provides a large new tax deduction for owners of pass-through entities and significantly increases individual AMT and estate tax exemptions. And it makes major changes related to the taxation of foreign income.The TCJA also eliminates or limits many tax breaks, and much of the tax relief is only temporary.
Here is a quick rundown of some of the key changes affecting individual and business taxpayers. Except where noted, these changes are effective for tax years beginning after December 31, 2017.
Key changes affecting individuals
Key changes affecting businesses
Businesses, payroll departments, human resource organizations and taxpayers may fall victim to ransomware attacks. A recent Colorado Springs Business Journal article shared one local company’s recent experience with “ransomware agony.” To prevent ransomware attacks from happening to you or your business, the IRS recommends talking to an IT Security expert as well as following a few key steps:
It is a small business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all sorts are finding it easier than ever to widen their markets by crossing state lines.
But therein lies a risk: Operating in another state means possibly being subject to taxation in that state. The resulting liability can, in some cases, inhibit profitability while in other cases it can produce tax savings.
Do you have “nexus?”
Essentially, “nexus” means a business presence in a given state that is substantial enough to trigger that state’s tax rules and obligations.
Precisely what activates nexus depends on that state’s chosen criteria. Triggers can vary by state, but common criteria can include:
A minimal amount of business activity in a given state may not create tax liability there. For example, an HVAC company that makes a few tech calls a year across state lines probably would not be taxed in that state. If you ask a salesperson to travel to another state to establish relationships or gauge interest – as long as he or she does not close any sales, and you have no other activity in the state, you likely will not have nexus.
If your company already operates in another state and you’re unsure of your tax liabilities there — or if you’re thinking about starting up operations in another state — consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes to which your business activities may expose you.
Keep in mind that the results of a nexus study may not be negative. For example, you may find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state.
The complexity of state tax laws offers both risk and opportunity. Contact your CPA business advisor to learn more.